CHAPTER 5 FIRMS IN COMPETITIVE MARKET

1. A firm has market power if it can

a. maximize profits.
b. minimize costs.
c. influence the market price of the good it sells.
d. hire as many workers as it needs at the prevailing wage rate.
2. A key characteristic of a competitive market is that
a. government antitrust laws regulate competition.
b. producers sell nearly identical products.
c. firms minimize total costs.
d. firms have price setting power.
3. Which of the following is not a characteristic of a competitive market?
a. Buyers and sellers are price takers.
b. Each firm sells a virtually identical product.
c. Entry is limited.
d. Each firm chooses an output level that maximizes profits.
4. Who is a price taker in a competitive market?
a. buyers only
b. sellers only
c. both buyers and sellers
d. neither buyers nor sellers
5. Free entry means that
a. the government pays any entry costs for individual firms.
b. government-funded research lowers the costs of patents and other barriers to entry.
c. a firm's marginal cost is zero.
d. no legal barriers prevent a firm from entering an industry.
6. Which of the following industries is most likely to exhibit the characteristic of free
entry?
a. electricity
b. satellite radio
c. mineral mining
d. tennis shoes
7. In a competitive market, no single producer can influence the market price because
a. many other sellers are offering a product that is essentially identical.
b. consumers have more influence over the market price than producers do.
c. government intervention prevents firms from influencing price.
d. producers agree not to change the price.
8. Firms that operate in perfectly competitive markets try to
a. maximize revenues.
b. maximize profits.
c. equate marginal revenue with average total cost.
d. All of the above are correct.
9. Which of the following statements regarding a competitive firm is correct?
a. Because demand is downward sloping, if a firm increases its level of output, the firm
will have to charge a lower price to sell the additional output.
b. If a firm raises its price, the firm may be able to increase its total revenue even though
it will sell fewer units.
c. By lowering its price below the market price, the firm will benefit from selling more
units at the lower price than it could have sold by charging the market price.
d. For all firms, average revenue equals the price of the good
10. Firms operating in competitive markets produce output levels where marginal
revenue equals
a. price.
b. average revenue.
c. total revenue divided by output.
d. All of the above are correct.
11. Whenever a perfectly competitive firm chooses to change its level of output, its
marginal revenue
a. increases if MR < ATC and decreases if MR > ATC.
b. does not change.
c. increases.
d. decreases
12. If a competitive firm is currently producing a level of output at which marginal
revenue exceeds marginal cost, then
a. a one-unit increase in output will increase the firm's profit.
b. a one-unit decrease in output will increase the firm's profit.
c. total revenue exceeds total cost.
 d. total cost exceeds total revenue
13. If a competitive firm is currently producing a level of output at which marginal cost
exceeds marginal revenue, then
a. a one-unit increase in output will increase the firm's profit.
b. a one-unit decrease in output will increase the firm's profit.
c. total revenue exceeds total cost.
d. total cost exceeds total revenue.
14. At the profit-maximizing level of output,
a. marginal revenue equals average total cost.
b. marginal revenue equals average variable cost.
c. marginal revenue equals marginal cost.
d. average revenue equals average total cost.
15. For a certain firm, the 100th unit of output that the firm produces has a marginal
revenue of $7 and a marginal cost of $10. It follows that the
a. production of the 100th unit of output increases the firm's profit by $3.
b. production of the 100th unit of output increases the firm's average total cost by $7.
c. firm's profit-maximizing level of output is less than 100 units.
d. production of the101st unit of output must increase the firm’s profit by more than $3.
16. Laura is a gourmet chef who runs a small catering business in a competitive industry.
Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month.
Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is
$200. In order to maximize profits, Laura should
a. make more than 20 wedding cakes per month.
b. make fewer than 20 wedding cakes per month.
c. continue to make 20 wedding cakes per month.
d. We do not have enough information to answer the question.
Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs:

Quantity Total Revenue Total Cost

0 $0 $5
1 $8 $9
2 $16 $14
3 $24 $20
4 $32 $27
5 $40 $35
6 $48 $44
7 $56 $54
8 $64 $65
9 $72 $72

17. Refer to Table 14-9. If the firm produces 3 units of output,

a. marginal cost is $4.
 b. total revenue is greater than variable cost.
c. marginal revenue is less than marginal cost.
d. the firm is maximizing profit.
18. Refer to Table 14-9. At which quantity of output is marginal revenue equal to marginal
cost?
a. 3 units
b. 5 units
c. 7 units
d. 9 units
19. Refer to Table 14-9. In order to maximize profit, the firm will produce a level of output
where marginal revenue is equal to
a. $6.
b. $7.
c. $8.
d. $9.
20. Refer to Table 14-9. In order to maximize profit, the firm will produce a level of output
where marginal cost is equal to
a. $6.
b. $7.
c. $8.
d. $9.
WRITING EXERCISE

Suppose that each firm in a competitive industry has the following costs:

Total cost: TC= 5 + ½ q2

Marginal cost: MC = q

where q is an individual firm’s quantity produced.

The market demand curve for this product is Demand: Q D = 120 - P

where P is the price and Q is the total quantity of the good. Currently, there are 9 firms in the
market.

a. What is each firm’s fixed cost? What is its variable cost? Give the equation for average total cost.
b. Graph average-total-cost curve and the marginal-cost curve for q from 5 to 15. At what quantity is
average-total-cost curve at its minimum? What is marginal cost and average total cost at that
quantity?

c. Give the equation for each firm’s supply curve.

d. Give the equation for the market supply curve for the short run in which the number of firms is
fixed.

e. What is the equilibrium price and quantity for this market in the short run?

f. In this equilibrium, how much does each firm produce? Calculate each firm’s profit or loss. Is there
incentive for firms to enter or exit?
 CHAPTER 6 MONOPOLY
1. A monopoly
a. can set the price it charges for its output and earn unlimited profits.
b. takes the market price as given and earns small but positive profits.
c. can set the price it charges for its output but faces a downward-sloping demand curve so it
cannot earn unlimited profits.
d. can set the price it charges for its output but faces a horizontal demand curve so it can earn
unlimited profits.
2. A monopoly can earn positive profits because it
a. can sell unlimited quantities at any price it chooses.
b. takes the market price as given and can sell unlimited quantities.
c. can set the price it charges for its output but faces a horizontal demand curve.
d. can maintain a price such that total revenues will exceed total costs.
3. A perfectly competitive market
a. may not be in the best interests of society, whereas a monopoly market promotes general
economic well-being
b. promotes general economic well-being, whereas a monopoly market may not be in the best
interests of society.
c. and a monopoly market are equally likely to promote general economic well-being
d. is less likely to promote general economic well-being than a monopoly market
4. Microsoft faces very little competition from other firms for its Windows software. Why isn’t
the price of the software $1,000 per copy?
a. because the government would not allow such a high price
b. because stockholders would not allow such a high price
c.because the company would sell so few copies that they would earn higher profits by selling at
a lower price
d. All of the above are correct
5. Which of the following is not a characteristic of a monopoly?
a. barriers to entry
b. one seller
c. one buyer
d. a product without close substitutes
6. A benefit of a monopoly is
a. lower prices.
b. a wide variety of similar products.
c. decreasing long-run average total costs.
d. greater creativity by authors who can copyright their novels.
7. Suppose most people regard emeralds, rubies, and sapphires as close substitutes for
diamonds. Then DeBeers, a large diamond company, has
a. less incentive to advertise than it would otherwise have.
b. less market power than it would otherwise have.
c.more control over the price of diamonds than it would otherwise have.
d. higher profits than it would otherwise have
 8. Which of the following would be most likely to have monopoly power?
a. a national florist
b. an online bookstore
c. a local restaurant
d. a local electrical cooperative
9. Most markets are not monopolies in the real world because
a. firms usually face downward-sloping demand curves.
b. supply curves slope upward.
c. firms usually equate price with marginal cost.
d. there are reasonable substitutes for most goods.
10. Which of the following is not an example of a barrier to entry?
a. Mighty Mitch’s Mining Company owns a unique plot of land in Tanzania, under which lies the only
large deposit of Tanzanite in the world.
b. A college student starts a part-time tutoring business.
c. A novelist obtains a copyright for her new book.
d. A taxi cab driver in New York City obtains a license to legally provide transportation in New York
City.
11. Patents, copyrights, and trademarks
a. are examples of government-created monopolies.
b. are examples of barriers to entry.
c. allow their owners to charge higher prices.
d. All of the above are correct.
12. Which of the following is a characteristic of a natural monopoly?
a. Fixed costs are typically a small portion of total costs.
b. Average total cost declines over large regions of output.
c. The product sold is a natural resource such as diamonds or water.
d. All of the above are correct.
13. In order to sell more of its product, a monopolist must
a. lobby the government for a subsidy.
b. lower its price.
c.advertise.
d. enact barriers to entry in related markets
14. A monopoly firm is a price
a. taker and has no supply curve.
b. maker and has no supply curve
c. taker and has an upward-sloping supply curve.
d. maker and has an upward-sloping supply curve.
15. The profit-maximization problem for a monopolist differs from that of a competitive firm
in which of the following ways?
a. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a
monopolist maximizes profit at the point where marginal revenue exceeds marginal cost.
b. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a
monopolist maximizes profit at the point where average revenue exceeds marginal cost.
c. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to marginal
 revenue at all other levels of output; for a monopolist, marginal revenue at the profit-maximizing level
of output is smaller than it is for larger levels of output.
d. For a profit-maximizing competitive firm, thinking at the margin is much more important than it is for a
profit- maximizing monopolist.
16. A monopolist can sell 300 units of output for $45 per unit. Alternatively, it can sell 301
units of output for $44.60 per unit. The marginal revenue of the 301st unit of output is
a. -$120.00.
b. -$75.40.
c. -$0.40.
d. $75.40.

Table 15-6
A monopolist faces the following demand curve:

Quantity Price
1 $15
2 $12
3 $9
4 $6
5 $3

17. Refer to Table 15-6. What is the marginal revenue from the sale of the 2nd unit?
a. $3
b.$3
c.$9
d.$24
18. Refer to Table 15-6. What is the marginal revenue from the sale of the 3rd unit?
a. -$3
b. $3
c. $9
d. $24
19. If the monopolist has a constant marginal cost for her product equal to $7, what is her
profit- maximizing price?
a. $6
b. $9
c. $12
d. $15
20. Suppose the monopolist has total fixed costs equal to $5 and a variable cost equal to $4
per unit for all units produced. What is the profit-maximizing price?
a. $6
b. $9
c. $12
d. $15
 Contents Perfectly Monopolistic Oligopoly Monopoly
Competitive Competitive
Firm Firm
(1) (2) (3) (4) (5)
Firm’s demand
curve is market
demand curve
Firm’s demand
curve is
horizontal
Firm’s demand
curve is
downward
sloping
MR<P
MR=P
Sold products
are largely the
same
Sold products
are different
Profit
maximization at
MC=MR
Profit
Maximization
MC=P
Price
discrimination
Many sellers in
the market
A few
competitors
No competitor
Firm’s demand
curve is elastic
Barriers in
entrance /exit
No barrier in
entrance/exit